Pleasant and Unpleasant Present Precedent Presented

Before we get into how the various choices within a college education affect income risk, there's a big decision that occurs right before that has a huge affect on income risk: the decision to go to college in the first place. Regardless of career path or major or anything, college is EXPENSIVE. By investing money into a college education (or, more likely, taking out student loans to pay for it), you are betting that the salaries open to you as a college graduate are larger enough than what you'd get with a high school education that it outweighs your student debt and the opportunity cost of all the time you're spending at a university instead of working. Now, obviously, everyone taking this class has made the exact same choice for this, but it's definitely important to consider how going to college affects your income risk. If income risk was the primary motivator for everyone in this class, then we can assume, at least for this group of people, that getting a degree reduces income risk.

But every college experience is different. The various choices within a college education can have different effects on income risk. I will detail a few of them.

Major

Your major definitely has a huge effect on your income, and thus your income risk. If you look at the statistics, major is unquestionably determinant. But not everyone chooses a major based on the expected income, otherwise every single student would gravitate to whatever major posted the highest-earning graduates that year. So what are the other factors to choosing a major?

Well, what you want to do for a living is probably the most determinant factor. People who wish to do interior design don't often major in chemistry. This is a decision for your own personal satisfaction that is often not dependent on income risk.

Another factor is classes. I know for a fact that there are people (including myself) who enjoyed a particular field of study in high school or as an underclassman and chose that as a major. If you really enjoy certain classes, you may choose that major just to experience more of those classes. Again, this is not done with income risk in mind, but rather to improve your own satisfaction of the college experience.

Student Debt

 Student debt is the bane of every modern day college student's existence. The looming monster ready to eat up your income for years and years as soon as you enter the job market. Why do we do this?

This one is definitely a decision prompted by income risk. You choose future debt because you know that, eventually, your income will outpace the debt enough to pay it off, and then you're living on easy street with a large college graduate income and no more student debt. Without going into debt to pay your tuition and get your degree, you wouldn't be making nearly as much, or so the idea goes. Thus, student debt is a symptom of income risk aversion.

Free Time

 Unless you are loading yourself up with an insane amount of classes during the semesters and during the summer, you're going to have some free time. So how should you spend it?

If you're looking toward reducing income risk, you're probably spending it working or doing internships. You are ensuring that you will be hired and that you are qualified for whatever your future position is by working and beefing up your resume and human capital. You may not have much time for fun, but future you will supposedly be better off because of this work.

Alternatively, if you're decision is based on what seems good right now, you'd probably not spend all of your free time working. You'd spend some time taking in the college experience, socializing, and just generally relaxing to reduce stress. There are ways this could result in less income risk (clubs and socializing may lead to connections which may lead to better jobs), but that is probably not the primary motivating factor.

Comments

  1. Professor ArvanOctober 19, 2017 at 3:29 PM

    There is a bit of a conceptual error in your first part about college tuition. To understand that I will simplify and talk about a random variable having a mean (call that the reward) and a variance (call that the risk). Sometimes you take on higher risk to get greater reward. There is no doubt that the expected return (income-wise) from college needs to more than offset the tuition cost, or otherwise the only people who would go to college would be doing so for the consumption benefit. However, this doesn't mean that the riskiness goes down. Indeed, what is missing from the story is that the earnings are off in the future while the tuition is now. You might enjoy a piece I wrote a few years ago, at least as part of the analysis on this issue. The proposed solution is more than a bit far-fetched, but at least might provoke your thinking some.

    Let me take on a few other points that you said. There is a question of whether return to major is a short term thing because there is some imbalance between supply and demand for that skill set. If the supply is short then wages are bid up. If the supply is long then wages are bid down. If students go to where they think wages will be high (and if this story has merit) then they might be disappointed to find that a few years out the supposedly high earning major doesn't do that anymore. You might have to think about this more in the Wayne Gretsky model. Gretsky was a truly great hockey player who had the reputation of being able to skate to where the puck will be. The rest of the player skate to where the puck currently is.

    In the free time part, presumably that is free time in college, I wonder if the focus is too much on the first job after graduation. With that as focus, what you say makes sense. Suppose however, that the focus is income risk 10 years out. Are there things that can be done now to reduce that income risk? (Hint: think of the discussion on Tuesday about you owning your own human capital. What human capital would be durable in that way)

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    Replies
    1. Peter DiamondOctober 22, 2017 at 2:11 PM

      I think that part of the reason I focused primarily on the first job after graduation is because your college experience and degree becomes less and less important with each successive job you take. As a college graduate with little to no job experience, your U of I degree is a huge part of your resume. However, once you've got a job, that first adult job will be the centerpiece of your resume and decrease the important of the degree (and thus its effect on income risk). However, you could argue that, given the degree's effect on what kind of first job you get, one could also argue that each successive job is the result of all previous jobs and thus ultimately dependent on your major.

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  2. William BaumolOctober 21, 2017 at 1:52 PM

    Your title is amazing. The font, alliteration, spacing, and syllables all mesh together to form the most alluring manifestation of titacular form. At first glance, it seems like it's just a regular title, but there is more to it, isn't there?

    ReplyDelete

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